The nature risk blind spot: Are financial institutions exposed?

With COP17 bringing global biodiversity commitments under scrutiny, new evidence reveals a widening gap between financial institutions' recognition of nature-related risks and their ability to manage them. The question is no longer whether nature matters to financial markets, but whether institutions are moving quickly enough to respond.

COP17: A critical moment for nature and finance

Last week, governments, businesses and financial institutions gathered in Yerevan, Armenia, for COP17, the United Nations Biodiversity Conference, to assess progress against the Kunming-Montreal Global Biodiversity Framework and its 23 targets for 2030.

The stakes are significant. More than half of global GDP is moderately or highly dependent on nature and its ecosystem services. Yet biodiversity continues to decline, threatening the natural systems underpinning economic activity, supply chains and financial markets.

For financial institutions, this is no longer simply an environmental or sustainability reporting issue. Nature loss presents potentially material financial risks, with implications for credit quality, investment returns, insurance exposure, asset valuations and long-term portfolio resilience.

And new evidence suggests that significant gaps remain between awareness and action.

A report published by BankTrack [1] on 26 October 2026, examining 30 major global banks financing forest-risk commodities, found that:

• 26 of 30 banks had not committed to aligning with the Global Biodiversity Framework.
• 29 of 30 banks had not developed time-bound transition plans to reduce the negative impacts of their financing on nature.
• One-third had no policies excluding finance for activities in biodiversity-rich areas.
• No bank met more than 12 of the 21 nature criteria that BankTrack used to evaluate nature action, covering bank commitments, exclusion policies and approach to nature-related risks.

These gaps persist despite almost two-thirds of banks publicly acknowledging the biodiversity crisis and its severity. Although banks’ interest in nature has grown, particularly in nature-positive financing, progress in reducing the adverse impacts of financing activities remains limited.

While the findings relate to a specific sample of major banks, they highlight a wider challenge: financial institutions may be increasing their commitments to nature-positive finance without adequately addressing nature-related risks embedded in their existing portfolios.

Financing nature-positive solutions is important. Understanding and managing the nature-related risks already on the balance sheet is equally critical.

Investors are paying attention. Are financial institutions keeping pace?

The Taskforce on Nature-related Financial Disclosures (TNFD) 2026 Status Report [2] provides compelling evidence of growing investor awareness.

The momentum extends to corporate reporting. More than 1,000 organisations across 56 countries or areas had published some level of TNFD-aligned disclosure, double the number identified a year earlier. This rapid voluntary uptake suggests that companies increasingly recognise nature as a material business and financial issue, rather than waiting for disclosure regulation to force action. It also means that a growing body of information on corporate dependencies, impacts, risks and opportunities is becoming available to lenders and investors.

Financial institutions representing US$26.6 trillion in assets under management had committed to TNFD-aligned reporting.

These figures demonstrate growing market engagement, but they also raise an important question.

Are financial institutions translating nature-related commitments and disclosures into better lending, investment, underwriting and risk-management decisions?

Recognition of risk is not the same as understanding exposure. And disclosure alone does not necessarily translate into improved financial resilience.

For banks, insurers, asset managers and asset owners, the next stage of maturity must be about connecting nature-related dependencies and impacts to financial consequences and strategic decisions.

Why nature risk matters to financial performance

Nature underpins economic activity through ecosystem services including freshwater availability, pollination, soil fertility, climate regulation and flood protection.

When these services deteriorate, the financial consequences can extend well beyond the businesses directly affected.

Consider the potential transmission pathways:

• Banks and lenders: Water scarcity, ecosystem degradation or changing land-use requirements can affect borrowers' operating costs, profitability and repayment capacity. For lenders, these pressures may translate into deteriorating credit quality, increased concentration risk and changes in collateral values.
• Insurers: Degraded natural systems can amplify physical risks. The loss of wetlands, forests and other natural buffers may increase exposure to flooding, erosion and other hazards, with implications for underwriting, claims and insurability.
• Asset managers and investors: Companies dependent on natural resources may face operational disruption, supply-chain instability, regulatory costs and changing market conditions. These risks can influence valuations, investment performance and long-term portfolio resilience.
• Asset owners: For pension funds, sovereign wealth funds and other long-term investors, nature loss presents both asset-specific and potentially systemic risks that may not be adequately captured through conventional financial analysis.

The challenge is that nature-related risks are often highly location-specific, interconnected and transmitted through complex value chains.

An important distinction for financial institutions is that nature-related impacts and financial risks are not necessarily equivalent. While a company's activities may have significant impacts on biodiversity, the financial materiality of those impacts depends on how they translate into regulatory, market, reputational or operational pressures that affect financial performance. Similarly, a company may depend heavily on nature, but whether those dependencies affect its default risk, for example, depends on the geographical context and ecological conditions.

Understanding these transmission pathways is therefore essential to distinguishing areas of high environmental impact from exposures that could materially affect portfolio performance and financial resilience.

Unlike climate change, where greenhouse gas emissions provide a widely used common measurement basis, nature cannot be adequately represented by a single universal metric.

But complexity should not become a reason for inaction.

What has changed? The tools are catching up

One of the most significant developments in 2026 is the increasing availability and alignment of frameworks, datasets and analytical methods to support nature-related financial assessments.

Three developments are particularly important.

1. TNFD LEAP 2.0: From assessment to financial decision-making

In October 2026, TNFD published the first major update to its LEAP assessment approach since September 2023 [3].

LEAP 2.0 provides additional guidance on:

• Assessing nature-related dependencies, impacts, risks and opportunities.
• Measuring the state of nature across land, freshwater and marine ecosystems.
• Assessing nature-related risks within financial institution portfolios.
• Integrating nature considerations into transition planning.
• Connecting assessment methodologies with science-based target-setting.

For financial institutions, this creates a more structured pathway from identifying potentially material exposures to evaluating their implications for financial risk and opportunity.

Importantly, firms do not need to assess every asset, borrower or investment simultaneously.

A risk-based approach can begin with portfolio-level screening, prioritising sectors, geographies and activities where nature-related dependencies and impacts are potentially most material.

2. Greater alignment between TNFD, SBTN and nature measurement

Also in October, the Science Based Targets Network (SBTN) released Science-Based Targets for Nature 2.0 [4], alongside the Nature Positive Initiative's State of Nature Indicators and Metrics [5].

The latter consolidates more than 600 existing state-of-nature metrics into four core indicators:

• Ecosystem extent
• Ecosystem condition
• Species extinction risk
• Species populations

Progress in measurement frameworks is being reinforced by improvements in the availability and granularity of geospatial nature data, with notable updates this year coming from the Global Ecosystems Atlas and IUCN’s Species Threat Abatement and Restoration (STAR) metric.

Together, these resources can help financial institutions connect nature metrics to asset locations and provide a more consistent foundation for measuring changes in nature.

For financial institutions, greater interoperability offers the prospect of more comparable approaches across corporate counterparties, investment portfolios and sectors. It also helps reduce the burden of navigating multiple frameworks independently.

3. Better data and clearer financial risk pathways

Nature-related data remain incomplete, particularly at asset and supply-chain level. However, financial institutions now have access to increasingly sophisticated tools to support initial assessments.

Resources such as ENCORE [6] can help identify how economic activities depend on and affect ecosystem services, while geospatial datasets can support the identification of nature-sensitive locations.

The Network for Greening the Financial System (NGFS) has also advanced guidance on nature-related financial risks [7], including the transmission of ecosystem degradation and nature-related transition pressures into economic and financial outcomes.

At the same time, nature reporting is beginning to converge around a more consistent global baseline. The ISSB's October 2026 Exposure Draft of its Nature-related Disclosures Practice Statement [8] builds directly on existing global sustainability standards and draws explicitly on the TNFD framework, responding to investor demand for nature information that is more consistent, comparable and verifiable. The proposed requirements focus on nature-related risks and opportunities that could affect companies' cash flows, access to finance or cost of capital, creating a much clearer bridge between corporate nature assessment and financial analysis. These developments mean financial institutions do not need perfect datasets or fully quantified models to begin identifying potentially material exposures.

A practical approach is to combine sector-level screening with progressively more detailed company, asset and location-specific analysis.

For higher-priority exposures, institutions can move beyond qualitative assessments to explore potential financial implications. This could involve evaluating how water scarcity affects borrowers' operating costs and creditworthiness, how ecosystem degradation influences insured losses, or how nature-related regulatory changes affect asset valuations.

Scenario analysis and sensitivity testing can support this process, even where data limitations prevent precise quantification. The objective should be to develop decision-useful estimates and understand the conditions under which nature-related risks could become financially material, rather than seeking a false level of precision.

The goal is not to produce the most comprehensive dataset. It is to generate information that improves financial decisions.

From biodiversity risk to financial opportunity

While much of the current discussion focuses on downside risk, nature also presents opportunities for financial institutions.

Investment in ecosystem restoration, sustainable land management, water resilience, nature-based infrastructure and resource efficiency can contribute to economic resilience while creating opportunities for capital deployment.

The TNFD's 2026 investor findings suggest that interest in these opportunities is increasing. However, financial institutions should distinguish between two complementary priorities.

First, managing existing exposure.

This means understanding how nature degradation and related policy, market or technological changes could affect current lending, underwriting and investment portfolios, and acting on the results of the assessment to better manage high-risk sectors, geographies or assets.

Second, identifying opportunities for value creation.

This includes financing activities that restore natural systems, reduce environmental dependencies, improve operational resilience and support sustainable economic development.

The greatest commercial opportunity may not lie exclusively in new nature-focused financial products. It may also lie in strengthening the resilience, performance and long-term value of existing assets and portfolios.

Five questions every financial institution should be asking

Financial institutions can build on established climate-related risk management processes to strengthen their approach to nature today, without waiting for further improvements in data standardisation and quality. For institutions beginning or advancing their nature-related risk journey, the priority should be to focus on decisions rather than attempting to assess everything at once.

Five questions provide a practical starting point.

1. Where are we most exposed? Which sectors, geographies, assets and value chains have the greatest potential dependencies and impacts on nature?

Begin with portfolio-level screening and prioritise areas where exposure may be financially material.

2. How could nature loss affect financial performance? Identify how ecosystem degradation, resource scarcity and nature-related transition pressures could affect revenues, operating costs, asset values, credit quality and portfolio resilience.

3. How can our current risk management practices be improved? Financial institutions have invested significantly in climate-related governance, risk management, scenario analysis, data infrastructure and reporting. Institutions could build on these foundations for robust nature-related risk management processes, starting with investment policies for high-risk sectors and high-value biodiversity areas, for example.

4. Where could better nature-related information change a decision? Focus on practical applications within credit assessment, investment due diligence, underwriting, portfolio management, stewardship and strategic planning. A key first step is location-specific data.

5. Where are the opportunities to protect and create value? Identify where investments in resilience, restoration, resource efficiency and improved environmental performance could reduce financial exposure or create new commercial opportunities.

The next frontier: From awareness to action

COP17 is an important reminder that global biodiversity commitments must translate into measurable outcomes. For financial institutions, the implications extend beyond sustainability reporting.

Nature-related risks are increasingly relevant to financial resilience, capital allocation and long-term value creation. The progress made through TNFD, SBTN, NGFS and improved analytical capabilities provides a stronger foundation for action than existed even a few years ago.

There is still considerable work to do. Data gaps remain, methodologies continue to evolve, and translating nature-related impacts into financial consequences is not straightforward. But these challenges should shape the approach, not delay it.

Financial institutions have spent more than a decade developing the capabilities to understand and manage climate-related financial risks. Nature presents a different, more location-specific challenge, but much of that existing infrastructure provides a valuable starting point.

The question is no longer whether nature loss creates financial risk. It is whether financial institutions understand where they are exposed, what that exposure could mean financially and how it should influence decisions today.

Those that move from awareness to action will be better positioned to manage emerging risks, identify opportunities and strengthen long-term resilience.

Nature risk is financial risk. The time to act is now.

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Thank you to the contributing authors: James Hilburn, Julia Jones, Loree Gourley, Tomos Murray and Bryan Lee. The authors bring together SLR’s expertise in sustainable finance, nature-related risks and opportunities, financial services, strategy and environmental advisory.

Together, they support financial institutions in understanding emerging environmental risks, strengthening portfolio resilience and translating sustainability challenges into informed financial and strategic decisions.